08/26/2010 01:28 pm ET Updated May 25, 2011

Should College Students Be Borrowing More?

Millions of people, young and old, start college this month. Most are new high school graduates, some are newly unemployed looking for a new career. But a haunting question for nearly all of these students and their families is "how exactly will we pay for this?"

Two-thirds of college freshmen say they are worried about their ability to finance their education. And there seems to be no slowdown in the increase in college costs: last year, while the Consumer Price Index fell by 2%, public colleges hiked tuition by 6.5%.

As of this summer, Americans now owe more in student loans than in credit card debt. However, most students should actually be borrowing more in student loans. Parents who advise to borrow as little as possible might be causing more harm than good.

Why? The median graduating student left college last year with a diploma and $19,999 in student loans. While this is entirely too high, there's something more frightening: 82% are carrying balances and racking up finance charges on their credit cards. While the recent credit card legislation will likely curb the predatory marketing practices targeted at college students, American college students are financing their education and living expenses with credit card debt. This is a mess.

Students can avoid a future financial meltdown by following a few simple rules:

Make sure you're borrowing enough to cover all of your expenses.

Millions of students do not max out on their student loans, yet they also carry credit card debt. Before even considering racking up credit card debt, make sure you are taking advantage of all student loan programs.

They'll have a much lower rate and can be deferred if you go to graduate school or experience hardship. Generally speaking, you should exhaust all of your federal loan options before taking out any private student loans.

Set a graduation debt ceiling.

As a general rule of thumb, try and set your target equal to your expected post-graduation annual salary. This rule of thumb comes from the idea that your monthly debt payment on a standard ten-year student loan should be no more than 15% of your monthly income.

While it's tough to know what your salary might be, check out sites like Glassdoor to get a rough estimate based on your field of study.


This should probably go without saying, but it's a major problem, with only 40% completing four-year degrees within six years.

Students who drop out don't get the increased wages that come with a degree, but they still have to pay off the debt they've accumulated. People with doubts about whether they can or want to finish should immediately discuss options with their school's financial aid office in order to avoid digging a deeper hole.

While we have a long way to go to fix higher education finance, students today need to spend better and borrow smarter. Putting a plan in place early on can allow you to look forward to your financial future, rather than fearing it.